DEFINITION: The term “dividend” refers to the amount of a company’s profits that are distributed to its shareholders from time to time, as opposed to being reinvested in the company.
Distribution intervals may be monthly, quarterly, or annually. The distributions may be received by shareholders in the form of either cash or additional stock.
The board of directors determines the timing and the dollar amount per share of all dividend distributions.
However, dividends must also be approved by the shareholders, voting according to their voting rights (based on the number of shares they own).
Shareholders of dividend-paying companies are entitled to receive a distribution if they purchase their stock before the “ex-dividend date,” which is the day before the day of the announcement of the total amount of the next dividend distribution—which naturally results in shares’ trading at a lower price.
One can easily calculate one’s total dividend distribution simply by multiplying the dollar amount per share times the number of shares that one owns.
However, neither the dollar amount per share nor the total distribution amount is of much use in determining a distribution’s relative generosity (or miserliness). This is because a more important factor has been overlooked—that is, the size of the associated share price.
For this reason, a different metric called the “dividend yield” is most often used, instead. It is expressed as a percentage and is calculated as follows:
dividend yield = amount per share ÷ share price
For example, if the dollar amount of the dividend is $2.00 per share and the share price is $50, then the dividend yield is four percent.
ETYMOLOGY: The English word “dividend” is attested from the fifteenth century.It derives from Middle English divident and, ultimately, from the gerundive dividendus (“ought to be divided”) of the Latin verb dīvido, dīvidere (“to divide up,” “to separate into parts”).
USAGE: A dividend is typically derived from the company’s net profits. It serves as a reward to shareholders for their investment in a company’s equity. As such, it is analogous to interest.
However, even if a company generates fewer or no profits during a given period, it may still elect to make dividend payments to shareholders.
Conversely, if a company continues to generate profits during a given period, it may elect not to make dividend payments and instead to reinvest the profits in the company.
In this way, dividend distributions are disanalogous to interest payments, which are legally required.
In addition to normal, regularly recurring dividends, companies may also issue special dividends from time to time on a one-off, non-recurring basis.
While dividends with the option of being received in cash are the most common, companies may also elect to issue dividends in the form of stock shares alone.
In addition to corporations, various mutual funds and exchange-traded funds may also pay dividends.
Moreover, certain types of companies—notably master limited partnerships (MLPs) and real estate investment trusts (REITs)—are legally required to provide designated distributions to their shareholders.
Various other funds may also distribute regular dividends according to their written investment objectives.
The businesses which most reliably pay dividends are larger, well-established companies with predictable profits.
The following industry sectors are famous for their consistent record of dividend payments:
- Basic materials
- Oil and gas
- Banks and financial institutions
- Healthcare and pharmaceuticals
- Utilities
Startups—particularly in the technology and biotech sectors—may not offer regular dividends.
These companies often retain earnings in order to reinvest in research and development, expand their businesses, and cover operating expenses during the early stages of development.